Correction: is a decline or downward movement of a stock, or market index. The amount of the decline is at least 10 percent, and a true correction exceeds that amount. In short, corrections are price declines that stop an upward trend. Most professionals consider a 20% or greater decline in a major index such as the S&P 500 to be a bear market correction.
Hedge Fund: An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Mutual Fund: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Secular Market: A long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.
Short Selling: This is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one. Since the risk of loss on a short sale is theoretically infinite, short selling should only be used by experienced traders who are familiar with its risks.
Earnings Per Share (EPS): The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.
EPS = (Net Income-Dividends on Preferred Stock)/ Average Outstanding Shares
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Earnings Per Share (EPS) Growth: An important metric in determining the sustainability of a stock’s longer term potential upside move. It is calculated as either quarterly or year on year growth rates. EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. If a company has an EPS of $5.00 in 2008 and EPS of $6.00 in 2009, the company has an EPS growth rate of $6.00/$5.00 – 1 = 20% during fiscal year 2009.
The formula is:
EPS Growth = (EPS this year) / (EPS last year) – 1; More generally, over t periods, Compounded EPS Growth = (EPS this period/EPS t periods ago)^(1/t) – 1